John Warrillow’s book, “Built to Sell”, is a classic read for business owners and entrepreneurs, including many of our clients. The central tenet of the book is that business owners should work towards building a business that they can sell, even if they have no intention of doing so. This subtle shift in thinking can help increase the value of any business by providing that business with a focused process and an ability to scale beyond the work that the owner can do herself.
Building a business to sell requires a good legal foundation.
Built to Sell: The Legal Foundation
Warrillow’s “Built to Sell” works from the basic principle that many business owners start out by creating businesses that rely too heavily on the owner’s direct involvement. A business like this cannot scale (and therefore make more money) and has no value to anyone but the owner. This may be especially true for businesses in the creative industries.
The book goes into the ways in which any business owner (including owners of creative businesses) can build a business that has value independent of the owner’s involvement and that can grow larger and more profitable. Well worth the read or listen (if you are the type that likes audiobooks). And you should build a business to sell even if you have no intention of selling. The book explains why.
While this post is a sort of companion to what is taught in that book, there are important takeaways here even if you don’t read the book. The things discussed apply to all businesses.
The Legal Entity
To create a sellable business, you need a business entity. That can be a corporation or an LLC or something else. The right choice varies depending upon the specifics of the business, but if your intent is to build a business that can be sold (even if you have no intention of doing so), you need to have some type of business entity in place. And sooner, rather than later.
Once the entity is formed, a business owner should ensure that the business entity is properly maintained and that equity in the company is given carefully and properly. If you begin with the end in mind, then you will know that when you are selling a business, you are often selling the legal entity itself, so it’s important to invest in this part of the process and secure legal counsel early on.
The Trademark
Trademarks are all about branding. And a sellable business relies on branding as a tool to help the business scale. This is why we would tell any business owner to consider their trademark early on. As part of that consideration, a trademark search needs to be completed and proper registrations need to be filed.
And, looking towards the end goal is important here. As part of the due diligence process, any buyer would want to know about a business’ trademark registration and brand, asking a variety of questions to determine whether the brand is secured with a trademark registration (meaning that the brand is entitled to all trademark registration benefits), and that all relevant trademark clearance has been done. And that the trademark is properly being enforced against potential infringers.
The Contracts
Contracts are actually a huge part of creating a sellable business. Customer contracts, contracts with suppliers, and contracts between owners all work to support the types of business relationships that create value. By having good contracts, a business owner can protect cashflow, ensure that invoices are paid on time, clarify ownership of IP rights, reduce the chances of disagreements between owners, and set standard terms for customers.
Going through the process of developing key contracts will help you identify the risks and opportunities and define the ways in which you want your business to work. That’s the key to contracts – they allow you to develop a system that forms that foundation for a sellable business with predictable revenue that runs without your direct involvement.
The Legal Counsel
Creating a business to sell is a process that can take a while. The path is fraught with opportunity and peril. But the great news is that you don’t need to go that road alone. Every business that sells will have an attorney on their team, and generally will have been with that attorney over the lifecycle of the business, from the beginning to the sale.
One value that an attorney provides is to help you define and understand various legal risks that could hamstring an otherwise successful sale. When a business is sold, it goes through a rigorous due diligence process where the potential buyer looks for legal risks (e.g. trademarks not registered properly, bad/unenforceable customer agreements, wrong entity type, etc.) that can crush business value. Having an attorney on board – and talking with that attorney – is a great way to catch these risks early and often.
Questions about this blog post? You can leave a comment below. Anything else you want to know and want to discuss? Get in touch with us.
